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Revisiting Staples Vs. Discretionaries

|Includes: SPDR S&P 500 Trust ETF (SPY), XLP, XLY

In a recent blog, we pointed out that discretionary stocks had take a lead over the more conservative staples. Since that update, discretionaries have surged while staples appear to have fallen off a cliff of relative performance. See the chart below:

Outperformance of discretionary stocks underscore that the "risk-on" trade is "on." Another confirming indicator included in our chart is the strength in copper prices. Copper tends to be viewed as an indicator of economic activity, which one would expect to correlate with discretionary stocks. Note the jump in copper prices (bottom section of the chart) occurred in early 2012 just as discretionary stocks (purple line) took off . Staples had peaked in December.

How have these indicators behaved over the longer term? Below is a weekly chart of the same indicators since 2005. Note the bounce in copper at the start of 2009 coincided with a surge in discretionaries. Interestingly, staples meandered in a trading range of relative strength.

This rather lackluster performance in staples perhaps indicates that such stocks are a parking lot for cash to earn dividends and remain "risk-off" while market uncertainty prevails. There was certainly quite a surge in staples in October 2007 as the financial crisis continued. But staples underperformed discretionaries since early 2009, suggesting that investors would have been better off watching the relationship between these two indicators, confirmed by an economic measure such as copper prices, to gain better relative returns.